 "Rajesh Gopinathan")
Rajesh Gopinathan
The India business was the biggest drag on Q3 (third quarter) numbers. Did you expect this to come down by almost nine per cent this quarter?
The India business is a project business, not an annuity one. From that perspective, an eight per cent fall is not completely out of line; last quarter, we had a five per cent increase. However, we had not expected it to be this bad but, then, as I said this is not a one-quarter phenomenon.
Also, government and public sector units (PSU) together is a large part of the India market and a large component of our India business because the private sector is still not the market driver. The decision-making mechanism in the government and PSU sectors gets impacted by the election cycle and that’s what we have seen. We don’t think that is going to change significantly in the next two or three quarters. Having said that, in a normal scenario, Q4 is volatile for India because of the capex push but I think this time around that’s unlikely. Everybody is going to be in a wait and watch mode and we are likely to see the weakness continuing till we are done with the elections.
Does that mean the India business will continue to be as weak as this quarter?
Not necessarily. But it will not bounce back in a meaningful manner. Will it be sequentially negative, I cannot say today but will have a better idea in a month or so...we’ll know in the middle quarter.
One highlight of the earnings was the cash performance. Take us through that. What have been the drivers this quarter?
This quarter, we have done well. We had total cash generation of about Rs 5,400 crore from the operations side and capex of Rs 750 crore and paid dividends of Rs 783 crore. After all of that, our cash reserve has gone up by Rs 3,750 crore to Rs 18,850 crore.
If you look at it, it is a fairly all-round performance. On the collection side, we have been able to improve our DSO (Days Sales Outstanding, the number of days taken to collect revenue after a sale is made). Our dollar-denominated DSOs have come down from 80 days to 79 days. Our international DSO, which we actually don’t report, has come down by two days, which is the larger chunk.
On the working capital side, too, we have been managing our ship tightly. Typically, Q1 (the first quarter) sees a lot of statutory payouts. Also, we have the salary hike in this quarter, which generates a one-time payout; in Q2, you have promotions kicking in, which generates a one-time spike. Compared to that, Q3 is a better quarter; it is more of a business as usual.
Typically Q3 and Q4 have better cash ratios than Q1 or Q2; the collection side will be better and also the payout side. On top of it, we had a forex swing this time. So, everything is positively contributing to the cash position.
Our-long term average of cash generation, subject to tweaking the business mix, is 17-19 per cent of the revenue. Last quarter, it was 18 per cent and before that, 11 per cent. So, it will vary q-o-q and also vary depending on where you are on the growth cycle.
Do you think the company will continue to see improvement in DSO days in the coming quarters?
That’s difficult to call out because you have to see DSO in the context of the business mix. In markets like India and emerging markets, the typical credit cycles are longer and it is a factor of cost of credit. You will find better cycles in the US and UK.
How do you see using your cash reserves, dividend or M&A (mergers & acquisitions?
We have a fairly stable dividend policy but that is something the board (of directors) decides. From an M&A perspective, we are not very aggressive; have been a steady acquirer. We are selective about what we acquire, both in terms of nature of asset -- it should either give us a capability or a new market presence -- and it has to be at the right price point.
Rupee volatility has meant huge swings in forex. Do you see a need for a change in your hedging strategy?
You expect that hedging reduces volatility but actually from a reported earnings perspective, as you do mark-to-market (repricing assets at current value) on the time value, etc, it introduces volatility in your reported earnings. So, paradoxically, in the current hedge accounting standard that we follow, a longer hedge book introduces volatility in your reported earnings.
We have to think of hedging policy as a combination of many things. What is the strategy -- maximising gains, reduce volatility or lower the risk? These are parts of what we are using the hedging policy for. Then comes the tenure. If you look at our hedging policy over the past few years, in terms of strategy, it has always been to minimise risk and volatility. Broadly, this has remained constant for many years.
From the tenure perspective, about two to three years earlier, we decided to lower tenure first to one year and then to two to three quarters. Similarly, on the instruments side, we were using forwards a lot earlier, then we were using a mix of range and forwards, and then we introduced vanilla (basic) options also in the mix. The honest answer is there is no one way. I would like to believe that our policy is stable and constantly evolving. As a part of our annual plan cycle, we will also take a look at this policy. But the current gain of Rs 299 crore and a loss of Rs 377 crore last quarter is not a reason for us to shift the policy.
Management has been saying deals in the digital space are increasing. What impact do you see of this on pricing and margins?
Margin call is difficult to say. Typically, new technology comes at higher price points than old. From a margins perspective, this does not necessarily translate into better margins because a lot of margin comes from scale and also getting the pyramid correct. One positive development on the digital front is the widespread acceptance of it among the customer base. If acceptance comes, big projects will kick in and looking at the momentum and its promise, it looks like this is yet another technology-defining moment.
TCS did have a realisation gain this quarter. Do you see pricing improving?
Pricing regimes are steady. If you look at pricing for the past six quarters, then in three quarters the pricing was up and in three quarters, down. There is no reason to call this a trend; it is a stable regime. The realisation would be a mix of business, not only pricing. The mix makes a difference. As digital comes in, it will help.
